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48 Bus. Law. 59 (1992-1993)
A Modest Proposal for Improved Corporate Governance

handle is hein.journals/busl48 and id is 95 raw text is: A Modest Proposal for Improved Corporate Governance By Martin Lipton and Jay W. Lorsch* THE IMPORTANCE OF EFFECTIVE BOARDS Corporate governance in the United States is not working the way it should. The problem is not the system of laws, regulations, and judicial decisions which are the framework of corporate governance. It is the failure by too many boards of directors to make the system work the way it should. The most obvious sign of this failure is in the gradual decline of many once great American companies. If boards of directors cannot find the solutions to these difficulties, the only realistic avenue for share- holders to voice their disapproval is to sell their shares. Directors eventually may act, as they recently did at General Motors1, but their actions often are late, after the shareholders have lost value, employees jobs, and the corporation its competitive market position. During the 1980s, it was argued by many academics and financiers that the disciplines of the capital markets, through the threats or actualities of takeovers, would cause managers to take corrective action to improve performance.2 We leave it to historians to decide whether this argument *Mr. Lipton is a partner of Wachtell, Lipton, Rosen & Katz in New York City. Mr. Lorsch is Senior Associate Dean, Chairman of Executive Education Programs, and Louis E. Kirstein Professor of Human Relations at The Graduate School of Business Administration of Harvard University. Messrs. Lipton and Lorsch are members of the Subcouncil on Corporate Governance and Financial Markets of the Competitiveness Policy Council. An earlier version of this article was considered by the Subcouncil at its August 5, 1992 meeting. 1. Joseph B. White & Paul Ingrassia, Board Ousts Managers At GM, Takes Control of Crucial Committee, Wall St. J., Apr. 7, 1992, at Al. 2. See, e.g., Frank H. Easterbrook & Daniel R. Fischel, The Proper Role of a Target's Man- agement in Responding to a Tender Offer, 94 Harv. L. Rev. 1161, 1169 (1981) (tender bidding process polices managers whether or not a tender offer occurs); RonaldJ. Gilson, A Structural Approach to Corporations: The Case Against Defensive Tactics in Tender Offers, 33 Stan. L. Rev. 819 (1981).

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